I’m a staff writer covering all things Wall Street and Investing. I have a love hate relationship with the world of finance. I am fascinated by the industry’s power and influence around the globe, and the ingenuity of the people it employs. Not so much a fan of the lack of accountability when the system fails—which it often does: I'm always on the hunt for people and companies to profile.

Calls To Break Up The Banks? All Talk, No Action

Calling for the re-enactment of the Glass-Steagall Act is the new black on Wall Street.

It’s a call being echoed from the most unusual of people like father of the financial supermarket, Sandy Weill. This week the former Citigroup chief did the unthinkable–he denounced the repeal of Glass-Steagall.

It’s unthinkable because it was his rebellious move to combine Travelers and Citibank which forced Congress to repeal the act in the first place thus creating a behemoth bank with both commercial and securities businesses.

But let’s forget all that for now, and let’s forget that Weill denouncing big banks is like Angelo Mozilo denouncing subprime loans.

Let’s get to the point that people like Weill seem to be making: Break up banks and the world will be safer. It sounds so simple but has anyone come up with a way to do so? No.

Think about the Volcker Rule and our regulators’ and lawmakers’ inability to even figure out how to write that rule. What seems like a simple, no-brainer idea (banks with FDIC-backed deposits can not trade on their own behalf for their own profit) has turned into a complicated mess with banks arguing that they need to be able to do make those trades to protect themselves. If one rule is causing so much debate how exactly are the calls for a break-up of big banks going to go down?

The answer: They’re not.Why? Like, I’ve said before, it’s because no one knows how and the only people who might have a clue are the banks themselves. Here’s what SNL analyst Nancy Bush says on the issue:

Would Jamie Dimon be able to simply split off his investment bank, call it J.P. Morgan & Co. and set the Chase retail franchise free to grow as a less-capital-intensive commercial bank? (Sounds simple enough, but somehow I think it would be a technological nightmare.)…

So “break them up” may be a popular mantra for Occupy Wall Street and its academic apologists, but I have yet to see anybody — Krugman, Fisher, Volcker, Stiglitz, Ken Rogoff, etc. — make any serious effort to examine this issue objectively and write about how this Herculean task might realistically be accomplished, not to mention what the sudden dearth of large banks might do to the American economy.

Think about Weill’s own baby, Citigroup, with its huge global reach–its international banking business is a key revenue driver for the firm. It also happens to be America’s third largest bank. So if Glass-Steagall is repealed what happens to Citi? Does it spin-out or sell its U.S. commercial bank while maintaining the dual investment/commercial banking model in the rest of the world? Who buys it? Another bank?

That might satisfy the calls of those who want to see banks broken up but what about U.S. banking clients who do business overseas?

“Repealing Glass-Steagall helped enable our banks to expand their services and geographies to best serve U.S. clients’ global needs. Now, in the wake of our own financial crisis, a globalizing economy with large banks throughout Europe, Asia and the rest of the world, do we want to hinder the competitive advantage of U.S. firms and reduce the reach of our regulators?,” writes Tony Fratto, a managing partner at Hamilton Place Strategies, former Assistant Secretary at the U.S. Treasury Department, and former deputy press secretary for the Bush White House.

The idea of “too big too fail” needs to be put in perspective. Consider this data from the The Clearing House, one of the nation’s oldest banking associations: The U.S. banking system is small (117% of GDP) compared to the banking systems in other developed countries such as the UK (373%), Germany (332%), Australia (192%), and Canada (138%). Looking at assets as a percent of GDP basis, the U.S. system is the smallest of the G7 countries similarly sized to that of South Africa, and 51% smaller than China’s banking system when compared to GDP.

There’s no defending a company, bank or not, that is too big to fail. But when the crisis hit in 2008 regulators played a huge role in making our biggest banks even bigger with the marriages of JPMorgan Chase and Washington Mutual, Bank of America and Merrill Lynch, Wells Fargo and Wachovia. Citi was the only bank to divest when it sold Smith Barney to Morgan Stanley. Here’s looking at you, Mr. Weill.

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